This Assessment deals with money, the Federal Reserve System, and the effects of money growth on the rate of inflation. In this Assessment, assume you are hired as an assistant quantitative analyst at a bank and one of your duties is calculating reserves and loans based on the total deposits in the bank.

Section 1: Deposits, Reserves and Loans

This section deals with increase in money supply given two scenarios (see a and b below). In Westlandia, the public holds 50% of money one (M1) in the form of currency, and the required reserve ratio is 20%.

1. Estimate how much the money supply will increase in response to a new cash deposit of $500 by completing the accompanying table.

(Hint: The first row shows that the bank must hold $100 in minimum reserves 20% of the $500 deposit against this deposit, leaving $400 in excess reserves that can be loaned out. However, since the public wants to hold 50% of the loan in currency, only $400 0.5 = $200 of the loan will be deposited in round 2 from the loan granted in Round 1.)

Round	Deposits	Required reserves	Excess reserves	Loans	Loan proceeds held as currency	Loan proceeds deposited
1	$500.00	$100.00	$400.00	$400.00	$200.00	$200.00
2	$200.00
3
4
5
6
7
8
9
10
Totals